The first hint of spring is in the air leaving this Economic Outlook in a position of cautious optimism.

Editorial

Some days in late winter are special. After a long period of cold, rays of sunshine warm up the soil and a hint of spring is in the air. Such atmosphere may raise spirits, and even may lead to a state of exuberance. But one should not be deceived – spring is not here yet.

These lines spring to mind when we consider the current state of the global economy. Following the worst year since the recovery from the global financial crisis, there are increasingly clear signs of a rebound. Global trade growth that we reported to have ground to a halt in our November Economic Outlook has been creeping up since late 2016. The same holds for global economic activity. It is straightforward that this in turn benefits trade growth, and vice versa. Moreover, the rebound of the prices of oil and commodities are on more solid ground now. This is precisely what is needed to trigger more investment. That in turn supports global GDP growth and trade. A virtuous cycle is being put into motion. It has led financial markets, especially equity markets, to rally, arguably reaching a state of exuberance.

Still, as economists, we are hesitant to consider it being more than the first trace. Firstly, although GDP growth is gearing up, the level of growth remains muted, dragged down by the eurozone and Latin America. Similarly, trade growth and, especially, investments remain far below pre-crisis levels. It is not the first time we highlight this. Yet, it is the first time that (the lack of) productivity growth has been brought to the centre of attention. Besides growth, as such, productivity dissemination, in particular to the emerging economies has seen a steep decline. Secondly, the recovery of trade growth is predominantly driven by the cyclical factors that we have just described. Underlying structural forces that are dragging down global trade growth have not changed. This includes the maturing of the benefits of creation of global value chains, the rebalancing of the Chinese economy and finance constraints. Thirdly, with the election of Donald J. Trump as president, the US has reinforced the global awareness of ‘America First’. Slightly differing from the administration, we interpret this as that what matters to the US, matters (perhaps even more) to the world, especially in matters of trade policy. It has led to a tripling of the level of economic policy uncertainty since early 2016. Our assessment is that trumpeting campaign promises is far from economic policymaking, let alone economic policy implementation. Nevertheless, the current level of uncertainty is unwanted at this stage of nascent economic recovery. Fourthly, the scent of spring has rallied financial markets. With economic forecasts and business profit forecasts hardly changed since the rally it seems difficult to deny the possibility of a correction.

The upshot is a picture of the global economy which undeniably shows signs of badly wanted acceleration of growth. At the same time, there is an unusual amount of uncertainty in the global economy, clouding the current outlook. That will constrain on firm and household spending. But alas, for the moment we should enjoy the first rays of sun.

John Lorié, Chief Economist Atradius

Executive Summary

The first hint of spring is in the air leaving this Economic Outlook in a position of cautious optimism. Global economic momentum, which began picking up in H2 of 2016, will push growth rates higher in 2017 and 2018. However, policy uncertainty, especially from the US, could upset the benign outlook.

Key points

Global GDP growth is forecast to accelerate to 2.9% this year from a disappointing 2.5% expansion recorded in 2016. This strong growth rate is expected to be maintained next year with another 3.0% expansion.

The eurozone outlook is robust with 1.7% growth expected in 2017, in line with the year before. The US economy is particularly strong with 2.1% growth forecast this year. UK economic growth is resilient at 1.7% compared to 1.8% in 2016, but the expansion is slowly easing.

Better policymaking and recovering commodity prices are pushing GDP growth in Latin America back into positive territory: 1.6%. Growth is also picking up to 2.4% in Eastern Europe. Emerging Asia continues to enjoy the highest regional growth rate in the world of 5.7% in 2017.

Insolvencies are forecast to be stable in advanced markets in 2017, marking the weakest year since the global financial crisis. Despite stronger economic outlooks in most emerging markets, lagged effects are keeping insolvencies rising in most emerging markets.

While the global economic situation did stabilise in 2016 after some early turbulence, the annual growth figure slowed to the slowest level since the Global Financial Crisis. Momentum has been picking up since late 2016 though in both developed markets and emerging economies. This is forecast to continue, supporting a more robust outlook for 2017 and 2018. The key trends that are driving the current economic outlook are presented in Chapter 1. On the positive side, we show there are signs of recovery for trade growth, a slight rebound in investment, high financial optimism and accommodative monetary and maybe even fiscal policy. However, most improvements pointed out are only weak, and one overhanging theme weighs on the outlook across most facets of the global economy: policy uncertainty, especially from the US.

In this light, we stress that risks remain tilted to the downside. US protectionism and misguided Fed policy top our ranking of risks to the global outlook. A slide in eurozone growth or a hard landing in China remain on the list though the probability of either remains low. Finally, we flag the risk of a correction to the post-Trump surge in equity markets.

The overall outlook for advanced economies is presented in Chapter 2. Robust consumption growth is the main driver or GDP growth in the eurozone, US, and UK while strong net exports are pushing the Japanese GDP forecast up. As the big election year in Europe continues to avoid populist outcomes, policy uncertainty remains high in the US and the UK. Tax cuts in the US should fuel rising confidence and underpin strong growth there. Business confidence remains high in the UK as well, but higher inflation is beginning to hurt Briton’s wallets, weighing on the growth outlook.

Economic growth in emerging markets is indeed rebounding after bottoming out in 2016. This is explored in Chapter 3. Higher growth in advanced markets is supporting exports while the shoring up of commodity prices is helping to stabilise some commodity-exporters. In an adverse scenario of unfavourable trade developments and tighter financial conditions though, some markets may be vulnerable. Those are the countries which are heavily reliant on trade with the US (Mexico and Vietnam), have large external financing needs (Malaysia) or low reserve adequacy (Vietnam), or a combination of the latter two (Argentina, South Africa, and Turkey). Rising protectionism, monetary tightening and slower growth in China will have an impact on emerging economies. But how strong economic growth will suffer from this, varies widely from country to country.

Chapter 4 updates our global insolvency outlook. Following a better-than-expected performance in 2016, corporate failures are expected to decrease only 1% in advanced markets in 2017. The outlook is relatively balanced with improvements most notably in the eurozone periphery where the absolute levels remain very high. Insolvencies are expected to tick up in both the US and UK, in part due to uncertainty but risks to the US business outlook lean to the upside with potential tax cuts and high business confidence. The emerging market insolvency outlook is more moderate for 2017, but it remains difficult as reforms constrain GDP growth and the recent slowdown continues to affect current activity.